1. Insights on Economic Impacts of Utility Mercury and CO 2 Controls Anne Smith Charles River Associates North Carolina DENR/DAQ Workshop on Mercury and CO 2 Raleigh, NC April 20, 2004

2. 2 Mercury Controls and Costs

3. 3 Mercury Sources and Control Options Hg comes primarily from coal generation Various retrofit controls are possible Co-benefits from PM, SO 2 and NO x control equipment, especially for bituminous (eastern) coals: CESP removes ~35% of Hg; FF removes 75-90% of Hg Wet FGD + CESP removes 60-70% of Hg SCR with WFGD + CESP removes 85-90% of Hg Activated carbon injection (ACI) Cheap to install, expensive to operate, for removals of 60-80% ACI with small baghouse Substantial capital cost, but lower operating costs 85%-90% removal appears possible All Hg controls still have uncertain removal potentials Co-benefits are likely, but magnitude still speculative ACI still being developed; not commercialized yet

4. 4 Hg Controls May Not Increase Projected Electricity Prices Much… But They Will Affect: Average Costs of Generation Regulated Electricity Rates Asset Values of Coal-fired Units Demand Supply $/kwh Q of Electricity Wholesale price Gas Nuc, Hydro Coal

5. 5 ~.5% increase in total COS ~ 2% increase in total COS Annual Costs ($ millions) -- CSA vs. 2.2 #/tBtu MACT 2008$278 2010$1,129 2012$1,083 2015$1,450 2018$2,225 CSA 2.2 #/tBtu MACT 2020$1,425 Source: A Framework for Assessing the Cost-Effectiveness of Electric Power Sector Mercury Control Policies, (# 1005224), EPRI, Palo Alto, California, May 2003 $4,574 $4,016 $3,913 $3,275 $2,002 $394

6. 6 Co-Benefits May Be Cheap But Require Flexibility in Timing 0 5 10 15 20 25 30 35 40 45 50 200420062008201020122014201620182020 Annual Tons Hg From Electricity Generation 1999 Emissions (ICR-based estimate) Projected Hg Co-Benefits from Proposed IAQR Industry EPA (approx.)

7. 7 Hg Trading Is Very Cost-Effective Compared to Hg Unit-Specific Targets EPAs proposed MACT would cost 5-10 times more than its proposed Hg Cap on NPV basis Hg trading is far more cost-effective: MACT achieves ~32 tons by 2008 Hg Cap achieves 15 tons by 2020 (32 tons at ~2012) Cost-effectiveness advantages of proposed trading rule would be heightened by technical improvements in Hg control options Timing flexibility gives opportunities for technology to improve before it must be implemented broadly Trading places a price on Hg emissions which also incentivizes technical improvements better than MACT

8. 8 Hg Trading Tends to Concentrate Reductions on the Largest Sources CSA Deposition Change -6% -4% -2% 0% -6%-4%-2%0% TX21 WI31 2.2 #/tBtu MACT Deposition Change Shaded area: Deposition under CSA is reduced more than under 2.2# MACT Source: A Framework for Assessing the Cost-Effectiveness of Electric Power Sector Mercury Control Policies, (# 1005224), EPRI, Palo Alto, California, May 2003

9. 9 CO 2 Controls and Costs

10. 10 CO 2 Sources and On-System Control Options CO 2 comes from coal, oil and natural gas generation But coal emits roughly 2x more CO 2 per kwh than natural gas Retrofit controls are the most costly control option Switch coal to gas: ~$30-50/tonne C for first few % (**) Switch coal to renewables: >$100/tonne C for first few % (**) Remove CO 2 from stack: ~$300/tonne C (large reductions) On-system controls are expensive even for new generation Build IGCC with C-sequestration: ~$100/tonne C Large reductions possible, but only with decades of lead-time (**) See next slide for further explanation

11. 11 Switching from Current Coal Generation Has Very Limited Potential Coal-to-Gas: A 20% reduction in current coal MWh: Would require a 50% increase in current gas generation Would require even more new gas plants to be built Would drive natural gas prices up (affecting other industry) Would reduce national CO 2 emissions <3% Coal-to-Renewables: A 10% reduction in current coal MWh: Would require >5-fold increase in renewable capacity Would reduce national CO 2 emissions <3% Both would drive $/tonne higher than the estimates on previous slide for first few % of reductions A multi-decade approach is required to achieve on-system reductions at less than $100/tonne C

12. 12 What About Offsets? Offsets are reductions in carbon that do not occur on-system Usually associated with Changes in land use practices Changes in forestry practices Energy demand-reduction projects Projects in other countries that reduce their CO 2 baseline Are currently much cheaper (<$10/tonne C) Issues Are these real reductions from baseline? Are these permanent reductions? Will they remain cheap once there is a real demand for them?

13. 13 Implications for Electricity Prices CO 2 policy will increases wholesale power prices, as well as raise cost-of-service and reduce asset values On-system reductions will cause large price increases This stands in direct contrast to SO 2, NO x and Hg control impacts. Demand Supply $/kwh Q of Electricity Wholesale price Gas Nuc, Hydro Coal

14. 14 What Do These Carbon Prices Mean to the Consumer? $100/tonne C: Cost of coal-fired generation doubles Cost of gas-fired generation increases by 35% Average cost of all generation increases ~60% Average retail electricity rates increase by ~30% $10/tonne C: Average retail electricity rates increase by ~3% ~ 5-15% Generation emissions reductions (2-5% change in national emissions) ~ 0% Generation emissions reductions (? change in national emissions)

15. 15 Regional Competitive Impacts Also Need to Be Considered Unilateral NC State Policy Power may be wheeled in from states without carbon cap Costs of power and costs of gas will rise to NC industry Industry that can move will do so, reducing NC jobs Consumers in NC will face cost-of-living increases National emissions will not be reduced As part of a unified national carbon policy Inter-regional competitive issues are diminished Concern is competition from international sources Some emissions will still leak and reappear elsewhere globally NC economy appears to face impacts similar to US-wide average impacts if the policy is nationally applied.

16. 16 Examples of Estimates of CO 2 Cap Costs to NC Economy (Kyoto Caps) 1 - Annex B Trade 2 - Annex B Trade w/No Hot Air 3 - No Trade 4 - Global Trade North Carolina Source: Charles River Associates SIAM Model Simulation Global Trade Annex B Trade (2) Trade only in US

17. 17 Change in GSP in Different States (Scenario: Kyoto with Annex B Trade - No Hot Air) 9 - North Carolina 10 - Tennessee11 - California California North Carolina Tennessee Source: Charles River Associates SIAM Model Simulation

18. 18 Estimated NC & US GSP Impacts Under McCain-Lieberman Bill (S.139) -2.50 -2.00 -1.50 -0.50 0.00 0.50 1.00 2005201520252035 Gross Regional Product (% change from baseline) Phase I only -- NC Phase I only -- US Phases I & II -- NC Phases I & II -- US Source: Costs to the State of North Carolina if EPA Regulated Carbon Dioxide Emissions Under the Clean Air Act by P. Bernstein and D. Montgomery, Charles River Associates, November 4, 2003.

19. 19 -12.00 -10.00 -8.00 -6.00 -4.00 -2.00 0.00 2.00 AgricultureEISManufacturingServicesElectricity Industrial Output (% change from baseline) 2010-Amended 2010-Original 2020-Amended 2020-Original Source: Costs to the State of North Carolina if EPA Regulated Carbon Dioxide Emissions Under the Clean Air Act by P. Bernstein and D. Montgomery, Charles River Associates, November 4, 2003. Estimated Impacts to NC Sectors Under McCain-Lieberman Bill (S.139) North Carolina Sectoral Impacts

20. Impacts to NCs economy would be far worse than the preceding estimates if NC were to act on its own.

21. Boston, Washington DC, Los Angeles, Philadelphia, Berkeley, Palo Alto, Salt Lake City, Austin, Houston London, Brussels, Toronto, Mexico City, Wellington, Brisbane, Melbourne